UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark one)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period _________________ to ___________________
Commission File Number 1-5366
EASTERN UTILITIES ASSOCIATES
(Exact name of registrant as specified in its charter)
Massachusetts 04-1271872
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
One Liberty Square, Boston, Massachusetts
(Address of principal executive offices)
02109
(Zip Code)
(617)357-9590
(Registrant's telephone number including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that
the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes...X.......No..........
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practical date.
Class Outstanding at April 30, 1998
Common Shares, $5 par value 20,435,997 shares
<TABLE>
PART I - FINANCIAL INFORMATION
EASTERN UTILITIES ASSOCIATES
CONSOLIDATED CONDENSED BALANCE SHEETS
(In Thousands)
<CAPTION>
March 31, December 31,
ASSETS 1998 1997
<S> <C> <C>
Utility Plant and Other Investments:
Utility Plant in Service $ 1,075,958 $ 1,079,361
Less: Accumulated Provision for Depreciation
and Amortization 382,546 376,722
Net Utility Plant in Service 693,412 702,639
Construction Work in Progress 9,666 5,538
Net Utility Plant 703,078 708,177
Investments in Jointly Owned Companies 71,528 69,749
Non-Utility Plant - Net 71,427 71,516
Total Plant and Other Investments 846,033 849,442
Current Assets:
Cash and Temporary Cash Investments 12,838 7,252
Accounts Receivable, Net 93,282 92,646
Notes Receivable 25,013 27,693
Fuel, Materials and Supplies 11,402 11,201
Other Current Assets 9,566 7,177
Total Current Assets 152,101 145,969
Deferred Debits and Other Non-Current Assets 302,674 275,341
Total Assets $ 1,300,808 $ 1,270,752
LIABILITIES AND CAPITALIZATION
Capitalization:
Common Shares, $5 Par Value $ 102,180 $ 102,180
Other Paid-In Capital 217,706 219,156
Common Share Expense (3,931) (3,931)
Retained Earnings 58,588 56,062
Total Common Equity 374,543 373,467
Non-Redeemable Preferred Stock - Net 6,900 6,900
Redeemable Preferred Stock - Net 27,721 27,612
Long-Term Debt - Net 330,297 332,802
Total Capitalization 739,461 740,781
Current Liabilities:
Long-Term Debt Due Within One Year 72,520 72,518
Notes Payable 70,766 61,484
Accounts Payable 29,983 35,036
Taxes Accrued 3,709 3,063
Interest Accrued 7,837 8,624
Other Current Liabilities 34,123 33,327
Total Current Liabilities 218,938 214,052
Deferred Credits and Other Non-Current Liabilities 175,271 152,526
Accumulated Deferred Taxes 167,138 163,393
Total Liabilities and Capitalization $ 1,300,808 $ 1,270,752
See accompanying notes to consolidated condensed financial statements.
</TABLE>
<TABLE>
EASTERN UTILITIES ASSOCIATES
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
(In Thousands Except Number of Shares and Per Share Amounts)
<CAPTION>
Three Months Ended
March 31,
1998 1997
<S> <C> <C>
Operating Revenues $ 139,306 $ 141,753
Operating Expenses:
Fuel 26,406 29,471
Purchased Power 27,891 32,509
Other Operation and Maintenance 41,015 41,342
Depreciation and Amortization 12,858 11,630
Taxes - Other Than Income 6,060 6,376
Income Taxes - Current 2,118 8,915
- Deferred (Credit) 4,467 (4,696)
Total 120,815 125,547
Operating Income 18,491 16,206
Other Income - Net 2,758 4,429
Income Before Interest Charges 21,249 20,635
Interest Charges:
Interest on Long-Term Debt 7,682 8,226
Other Interest Expense 1,971 1,594
Allowance for Borrowed Funds Used
During Construction (Credit) (96) (240)
Net Interest Charges 9,557 9,580
Net Income 11,692 11,055
Preferred Dividends of Subsidiaries 576 576
Consolidated Net Earnings $ 11,116 $ 10,479
Weighted Average Number of
Common Shares Outstanding $20,435,997 $20,435,997
Consolidated Basic and Diluted Earnings
Per Average Common Share $ 0.54 $ 0.51
Dividends Paid $ 0.415 $ 0.415
See accompanying notes to consolidated condensed financial statements.
</TABLE>
<TABLE>
EASTERN UTILITIES ASSOCIATES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(In Thousands)
<CAPTION>
Three Months Ended
March 31,
1998 1997
<S> <C> <C>
CASH FLOW FROM OPERATING ACTIVITIES:
Net Income $ 11,692 $ 11,055
Adjustments to Reconcile Net Income
to Net Cash Provided from Operating Activities:
Depreciation and Amortization 14,386 13,153
Deferred Taxes 4,175 (4,600)
Non-cash Expenses on Sales of Investments
in Energy Savings Projects 1,730 2,652
Investment Tax Credit, Net (391) (300)
Allowance for Funds Used During Construction (40) (46)
Collections and sales of project notes and leases rec. 4,145 2,605
Other - Net (5,325) 337
Change in Operating Assets and Liabilities (3,943) 3,024
Net Cash Provided From Operating Activities 26,429 27,880
CASH FLOW FROM INVESTING ACTIVITIES:
Construction Expenditures (16,130) (20,373
Collections on Notes and Lease Receivables of EUA Cogenex 744 2,922
Increase in Other Investments (3,157) (107)
Net Cash (Used in) Investment Activities (18,543) (17,558
CASH FLOW FROM FINANCING ACTIVITIES:
Redemptions:
Long-Term Debt (2,525) (3,022)
EUA Common Share Dividends Paid (8,481) (8,482)
Subsidiary Preferred Dividends Paid (576) (576)
Net Increase (Decrease) in Short-Term Debt 9,282 (4,675)
Net Cash Used in Financing Activities (2,300) (16,755
Net Increase (Decrease) in Cash and Temporary Cash Invest. 5,586 (6,433)
Cash and Temporary Cash Investments at Beginning of Period 7,252 12,455
Cash and Temporary Cash Investments at End of Period $ 12,838 $ 6,022
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest (Net of Capitalized Interest) $ 9,885 $ 10,086
Income Taxes $ 7,599 $ 7,263
Supplemental schedule of non-cash investing activities:
Conversion of Investments in Energy Savings
Projects to Notes and Leases Receivable $ 735 $ 2,189
See accompanying notes to consolidated condensed financial statements.
</TABLE>
EASTERN UTILITIES ASSOCIATES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
The accompanying Notes should be read in conjunction with the Notes to
Consolidated Financial Statements incorporated in the Eastern Utilities
Associates (EUA or the Company) 1997 Annual Report on Form 10-K.
Note A -In the opinion of the Company, the accompanying unaudited consolidated
condensed financial statements contain all adjustments (consisting of only
normal recurring accruals) necessary to present fairly its financial position
as of March 31, 1998 and the results of operations and cash flows for the
three months ended March 31, 1998 and 1997. The year-end consolidated
condensed balance sheet data was derived from audited financial statements but
does not include all disclosures required under generally accepted accounting
principles.
As more fully discussed in "Management's Discussion and Analysis of
Financial Condition and Results of Operations", customer choice of electricity
supplier commenced on January 1, 1998 and March 1, 1998 for EUA's Rhode Island
and Massachusetts retail distribution customers, respectively. Coincident
with retail access, Montaup Electric Company (Montaup), EUA's generation and
transmission company, began billing its affiliated EUA electric distribution
companies, Blackstone Valley Electric Company (Blackstone) and Newport
Electric Corporation (Newport), in Rhode Island, and Eastern Edison Company
(Eastern Edison), in Massachusetts, a contract termination charge (CTC). The
CTC permits Montaup to recover, among other things, its above market
investment in generation assets over a period of twelve years, a period
shorter than the expected useful lives of these assets. As a result, Montaup
is deferring revenue in an amount equal to the difference between depreciation
expense recorded pursuant to generally accepted accounting principles and the
level of asset recovery included in the CTC. In addition, provisions of the
CTC formula require Montaup to accrue and/or defer revenues related to
recovery of certain of its generation-related expenses.
Effective January 1, 1998, EUA adopted the Financial Accounting
Standards Board's Statement No. 130, "Reporting Comprehensive Income," which
establishes standards for reporting comprehensive income and its components
(revenues, expenses, gains, and losses) in a set of general-purpose financial
statements. This Statement requires that all items that are required to be
recognized under accounting standards as components of comprehensive income be
reported in a financial statement that is displayed with the same prominence
as other financial statements. Comprehensive income of EUA is immaterial and
therefore no recognition is required.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Note B - Results shown above for the respective interim periods are not
necessarily indicative of results to be expected for the fiscal years due to
seasonal factors which are inherent in electric utilities in New England. A
greater proportionate amount of revenues is earned in the first and fourth
quarters (winter season) of most years because more electricity is sold due to
weather conditions, fewer day-light hours, etc.
Note C - Commitments and Contingencies:
Recent Nuclear Regulatory Commission (NRC) Actions
General:
Recent actions by the NRC indicate that the NRC has become more critical
and active in its oversight of nuclear power plants. EUA is unable to predict
at this time, what, if any, ramifications these NRC actions will have on any
of the other nuclear power plants in which Montaup has an ownership interest or
power contract.
Millstone 3:
Montaup has a 4.01% ownership interest in Millstone 3, an 1154-mw nuclear
unit that is jointly owned by a number of New England utilities, including
subsidiaries of Northeast Utilities (Northeast). Subsidiaries of Northeast
are the lead participants in Millstone 3. On March 30, 1996, it was necessary
to shut down the unit following an engineering evaluation which determined
that four safety-related valves would not be able to perform their design
function during certain postulated events.
On April 8, 1998, Northeast announced that Millstone 3 was ready for NRC
inspection indicating that virtually all of the restart-required physical work
had been completed. Various independent inspections are required prior to
restart. EUA cannot predict when the plant will be restarted.
While Millstone 3 is out of service, Montaup will incur incremental
replacement power costs estimated at up to $1 million per month.
In August 1997, nine non-operating owners, including Montaup, who
together own approximately 19.5% of Millstone 3, filed a demand for
arbitration against Connecticut Light and Power (CL&P) and Western
Massachusetts Electric Company (WMECO) as well as lawsuits against Northeast
and its Trustees. CL&P and WMECO, owners of approximately 65% of Millstone 3,
are Northeast subsidiaries that agreed to be responsible for the proper
operation of the unit.
The non-operating owners of Millstone 3 claim that Northeast and its
subsidiaries failed to comply with NRC regulations, failed to operate the
facility in accordance with good utility operating practice and attempted to
conceal their activities from the non-operating owners and the NRC. The
arbitration and lawsuits seek to recover costs associated with replacement
power and operation and maintenance (O&M) costs resulting from the shutdown of
Millstone 3. The non-operating owners conservatively estimate that their
losses will exceed $200 million.
Montaup pays its share of Millstone 3's O&M expenses on a reservation of
right basis. The fact that Montaup makes payment for these expenses is not an
admission of financial responsibility for expenses incurred or to be incurred
due to the outage.
EUA cannot predict the ultimate outcome of the NRC inquiries or legal
proceedings brought against CL&P, WMECO and Northeast or the impact which they
may have on Montaup and the EUA system.
Maine Yankee:
On August 6, 1997, as the result of an economic evaluation, the Maine
Yankee Board of Directors voted to permanently close that nuclear plant.
Montaup has a 4.0% equity ownership in Maine Yankee.
On November 5, 1997, Maine Yankee submitted a rate filing to the FERC to
provide for recovery of its costs during the decommissioning period. The
filing provides for the investment in plant, nuclear fuel and associated
facilities to continue to be recovered through October 2008.
On November 6, 1997, Maine Yankee submitted an estimate of its costs to
the FERC reflecting the fact that the plant was no longer operating and had
entered the decommissioning phase. On January 14, 1998, the FERC accepted the
new rates, subject to refund, and amounts of Maine Yankee's collections for
decommissioning. FERC also granted intervention requests and ordered a public
hearing on the prudency of Maine Yankee's decision to shut down the plant and
on the reasonableness of the proposed rate amendments.
Also, as a result of the August 1997 shutdown, Montaup and the other
equity owners have been notified by the Secondary Purchasers that they will no
longer make payments for purchased power to Maine Yankee. The Secondary
Purchase Contracts are between the equity owners as a group and 30
municipalities throughout New England. Presently, the equity owners are
making payments to Maine Yankee to cover the payments that would be made by
the municipals.
On November 28, 1997, the Secondary Purchasers sent a Notice of
Initiation of Arbitration to the equity owners of Maine Yankee. On December
15, 1997, the equity owners as a group filed at FERC a Complaint and Petition
for Investigation, Contract Modification, and Declaratory Order. On April 7,
1998, a Maine judge denied the Secondary Purchasers' motion to compel
arbitration and indicated the jurisdictional question should be first decided
by FERC. On April 15, 1998, the Secondary Purchasers notified FERC of the
judge's decision and asked for expedited action on the pending complaint
against them for non payment. The equity owners are seeking an order from
FERC declaring that the Secondary Purchasers remain responsible for payments
due under the Purchase Contracts and directing the Secondary Purchasers to
make such payments. The equity owners also seek a modification of the
Secondary Purchase Contracts to extend the termination date or otherwise to
ensure that the equity owners may fully recover from the Secondary Purchasers
a share of the costs of shutting down and decommissioning the Maine Yankee
plant that is proportionate to the Secondary Purchasers' entitlements to
energy from the plant. Management does not believe that this contract issue
will have a material effect on EUA's future operating results or financial
position and cannot predict its ultimate outcome at this time.
Department of Energy Actions:
In addition to its 4.0% equity ownership in Maine Yankee,
Montaup also has a 4.5% equity ownership interest in both the Yankee Atomic
and Connecticut Yankee nuclear generating stations. Both of these facilities
have permanently ceased power generation operations and are in the process of
decommissioning the sites.
In early 1998, Yankee Atomic, Maine Yankee and Connecticut
Yankee, individually, as well as a number of other utilities, filed suit in
federal appeals court seeking a court order to require the Department of
Energy (DOE) to immediately establish a program for the disposal of spent
nuclear fuel. Yankee Atomic and Connecticut Yankee are also seeking damages of
approximately $70 million and $90 million, respectively. Under the Nuclear
Waste Policy Act of 1992, the DOE was to provide for the disposal of
radioactive wastes and spent nuclear fuel starting in 1998 and has collected
funds from owners of nuclear facilities to do so. On February
19, 1998, Maine Yankee also filed a petition in the U.S. Court of Appeals
seeking to compel the Department of Energy to remove and dispose of the spent
fuel at the Maine Yankee site. Under their Standard Contract, the DOE had a
deadline for beginning the removal process at all nuclear plants on January
31, 1998, which was not met. On May 5, 1998, the Court of Appeals denied
several motions brought in the proceeding, including several motions for
injunctive relief brought by the utility petitioners. In particular, the
Court denied the requests to require the DOE to immediately establish a
program for the disposal of spent nuclear fuel. Management cannot predict the
ultimate outcome of this issue.
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
The following is Management's discussion and analysis of certain
significant factors affecting the Company's earnings and financial condition
for the interim periods presented in this Form 10-Q.
Overview
Consolidated net earnings for the first quarter of 1998 were $11.1
million compared to first quarter 1997 net earnings of $10.5 million. Net
Earnings contributions by Business Unit for the first three months of 1998 and
1997 were as follows (in thousands):
Three Months Ended March 31,
1998 1997
Core Electric Business $11,890 $10,901
Energy Related Business (428) (510)
Corporate (346) 88
Consolidated $11,116 $10,479
The increase in the net earnings contribution of the Core Electric
Business in the first quarter of 1998 was primarily due to increased base
revenues resulting largely from a 0.7% increase in electricity sales in this
year's first quarter and revenues which were accrued pursuant to approved
settlement agreements. The 0.7% increase was led by a 5.4% increase in sales
to industrial customers signaling an improvement in economic conditions in the
Company's service territory.
Net Earnings of our Energy Related Business Unit increased by
approximately $100,000 in the first quarter of 1998 as compared to the same
period of a year ago. EUA Cogenex operated at a loss of approximately
$240,000 in the first quarter of 1998, an improvement of approximately
$400,000 from its first quarter 1997 operating loss. The 1997 operating loss
included a first quarter 1997 net gain of approximately $500,000 resulting
from a change in EUA Cogenex pension and post-retirement welfare benefit
plans. Losses incurred by the BIOTEN partnership and Transcapacity L.P.
aggregated approximately $900,000 for the quarter, approximately $100,000 less
than the losses incurred in the first quarter of 1997.
Net Earnings of the Corporate Business Unit decreased by approximately
$400,000. This change is due primarily to an increase in general business
reserves for certain claims recorded by EUA, the parent company, in the first
quarter of 1998.
Operating Revenues
Operating Revenues for the first three months of 1998 decreased by
approximately $2.4 million to approximately $139.3 million when compared to
the same period of 1997. Operating Revenues by Business Unit for the first
quarter of 1998 and 1997 were as follows (in thousands):
Three Months Ended March 31,
1998 1997
Core Electric Business $126,590 $128,224
Energy Related Business 12,716 13,529
Corporate 0 0
Consolidated $139,306 $141,753
Core Electric Business revenues decreased approximately $1.6 million due
primarily to decreased recoveries of fuel, purchased power and conservation
and load management (C&LM) expenses aggregating approximately $7.3 million and
rate reductions pursuant to electric industry restructuring legislation and
approved settlements agreements. Offsetting these decreases somewhat were
1.3% base rate increases for Blackstone and Newport effective January 1, 1998
pursuant to the Rhode Island Utility Restructuring Act of 1996 (URA),
increased retail kilowatthour sales and revenues accrued pursuant to approved
settlement agreements.
EUA Cogenex revenues, which account for nearly all of the Energy Related
Business Unit revenues, decreased by approximately $800,000 due primarily to
decreased revenue of EUA Cogenex-West and Cogenex partnerships aggregating
approximately $2 million and decreased project sales at the Cogenex Division
of approximately $400,000 offset by increased revenue of EUA Citizens
Corporation of approximately $1.5 million.
Operating Expenses
Fuel expense of the Core Electric Business for the first quarter of 1998
decreased from that of the same period in 1997 by approximately $3.1 million
or 10.4%. Nuclear units provided a greater share of system requirements and a
14% decrease in the cost of fossil fuels resulted in a 15% decrease in average
fuel costs.
Purchased Power expense for the first quarter of 1998 decreased
approximately $4.6 million or 14.2% as compared to last year's first quarter.
Lower costs billed to Montaup by Maine Yankee, Connecticut Yankee, and Ocean
State Power in 1998's first quarter were primarily responsible for this
change.
Other Operation and Maintenance (O&M) expenses for the quarter ended
March 31, 1998 decreased approximately $300,000 or less than 1% from the same
period in 1997 due to the following: Direct expenses of the Core and Corporate
Business units increased by approximately $800,000 in this year's first
quarter due primarily to increased customer accounts and increased legal
expenses.
Indirect expenses, items in which we have limited short-term control or
items which are fully recovered in rates, increased by approximately $100,000
in the first quarter of 1998 as compared to the same period of 1997.
Expenses of the Energy Related Business unit decreased by approximately
$1.3 million for the period. This decrease is primarily due to decreased
expenses at EUA Cogenex of approximately $1.6 million as a result of decreased
operating activity and on going cost control efforts, offset by increased
expenses at EUA Transcapacity of approximately $200,000.
Income Taxes
EUA's effective tax rate for the quarter ended March 31, 1998 was
approximately 40.1% compared to 35.3% for the same period of a year ago.
Provisions of restructuring settlement agreements which require the
acceleration of the catch-up of deferred tax deficiencies created under prior
regulatory practices are primarily responsible for this change.
Depreciation and Amortization Expense
Depreciation and Amortization expense increased approximately $1.2
million or 10.6% in the first quarter of 1998 when compared to last year's
first quarter due largely to increased Core Electric plant in service and
increased depreciation at EUA Cogenex.
Other Income and (Deductions) - Net
Other Income and (Deductions) - Net decreased by approximately $1.7
million in this year's first quarter. This decrease is due primarily to an
increase in general business reserves for certain claims recorded by EUA, the
parent company, in this year's first quarter and to the non-recurrence of
interest income recorded in last year's first quarter related to the favorable
resolution of a Massachusetts corporate income tax dispute.
Liquidity and Sources of Capital
The EUA System's need for permanent capital is primarily related to
investments in facilities required to meet the needs of its existing and
future customers.
Traditionally, cash construction requirements not met with internally
generated funds are financed through short-term borrowings which are
ultimately funded with permanent capital. In July 1997, several EUA System
companies entered into a three-year revolving credit agreement allowing for
borrowings in aggregate of up to $120 million. As of March 31, 1997, various
financial institutions have committed up to $75 million under the revolving
credit facility. Outstanding short-term debt at March 31, 1998 and December
31, 1997 by Business Unit was as follows (in thousands):
March 31, 1998 December 31, 1997
Core Electric Business $10,360 $ 7,075
Energy Related Business 44,496 44,609
Corporate 15,910 9,800
Consolidated $70,766 $61,484
For the three months ended March 31, 1998, internally generated funds
amounted to approximately $25.8 million while the EUA System's cash
construction requirements amounted to approximately $16.1 million for the same
period. Various laws, regulations and contract provisions limit the use of
EUA's internally generated funds such that the funds generated by one
subsidiary are not generally available to fund the operations of another
subsidiary.
In March 1998, EUA's Board of Trustees authorized the repurchase of up to
$3 million of EUA's outstanding common shares. The program authorizes EUA to
purchase shares from time to time in the open market or through privately
negotiated transactions in conformity with the rules of the Securities and
Exchange Commission.
Electric Utility Industry Restructuring
The electric utility industry in both Massachusetts and Rhode Island, the
states in which EUA provides electric services, is transitioning from a
traditional rate regulated environment to a competitive marketplace.
Traditional electric utility services - generation, transmission and
distribution - have been unbundled into separate and distinct services. The
generation, or supply, function is now competitive with customers able to
choose their own electricity supplier at market prices. The transmission and
distribution functions remain regulated services. The local distribution
company is responsible for providing distribution services to the ultimate
electricity consumer within its franchised service territory and the
transmission company is required to provide open access, non-discriminatory
transmission services to generation or supply companies.
Legislation in both Rhode Island and Massachusetts along with approved
electric utility industry restructuring settlement agreements in both states
and at the federal level, provided EUA's Rhode Island and Massachusetts
electric customers with choice of electricity supplier and immediate rate
reductions commencing January 1, 1998 and March 1, 1998, respectively. Until
a customer chooses an alternative supplier, that customer will receive
standard offer service. Blackstone and Newport are required to arrange for
standard offer service through December 31, 2009 and Eastern Edison must
arrange for this service through 2004. Montaup has guaranteed standard offer
supply at a fixed price schedule for the duration of the standard offer
periods. The guaranteed standard offer price will increase over time to
encourage customers to leave standard offer service and enter the competitive
power supply market. Under the approved settlement agreements, Blackstone,
Newport and Eastern Edison agreed to subject their standard offer requirements
to a competitive bidding process in which competitive suppliers would bid
against the guaranteed price offered by Montaup. The competitive process was
completed in April, and resulted in none of the standard offer requirements
being awarded to competitive suppliers. Montaup will therefore continue to
provide the unawarded standard offer requirement at the indicated fixed price
schedule. This wholesale standard offer service will be assigned
proportionately to purchasers of Montaup's generating capacity.
Provisions of the approved settlement agreements also allowed Montaup to
replace its all-requirements wholesale contracts with its affiliated retail
distribution companies with a contract termination charge (CTC) which permits
Montaup to recover, among other things, its above market investments and
commitments in generation assets. Montaup began billing the CTC coincident
with retail access and the distribution companies are recovering the CTC
through a non-bypassable transition access charge to all of their distribution
customers.
As part of the approved settlement agreements, Montaup agreed to divest
its entire generation portfolio. The net proceeds of the sale, as defined in
the settlement agreements, will be used to mitigate Montaup's CTC to its
retail affiliates via a Residual Value Credit (RVC). The RVC will reduce the
fixed component of the CTC for the net proceeds, with a return, in equal
annual amounts over the period commencing on the date the RVC is implemented
through December 31, 2009. See Divestiture below.
For a more detailed discussion of electric industry restructuring, refer
to EUA's 1997 Annual Report on Form 10K.
Massachusetts Referendum
The Office of the Attorney General has certified a referendum petition to
repeal the Electric Industry Restructuring Act (the Act) as a matter
appropriate for a referendum initiative. The Act was signed into law in
November 1997. A petition was filed with the Election Division of the Office
of the Secretary of State in February 1998. A question on repealing the Act
will be presented to voters on the November 1998 ballot. EUA and the electric
industry in Massachusetts are actively opposing repeal. Management cannot
predict the outcome of the November ballot question.
Divestiture
Montaup began marketing its entire generation portfolio in July 1997, and
subsequently received bids from a number of potential purchasers. On January
23, 1998, based on a review of the offers and discussions with potential
purchasers, Montaup announced that it was reopening the sales process on the
majority of its generating assets and expects to execute purchase and sale
agreements by mid 1998. In March 1998, Montaup announced it would combine the
marketing of its 50% share (approximately 290 mw) in Unit 2 of the Canal
Generating station on Cape Cod with sales efforts of the plant's co-owner and
operator, Canal Electric Company. By doing this, potential purchasers are
offered an expandable site that includes 1,100 mw of existing generating
capacity, an excellent operating record and the capability of burning either
natural gas or oil as a fuel. In April 1998, EUA announced the signing of
agreements for the transfer of power purchase contracts for
approximately 160 mw between Montaup and Ocean State Power and the sale of two
diesel-powered generating units (totaling approximately 16 mw) owned by
Newport. Both the transfer of the power contracts and sale of the diesel
generating units are subject to regulatory approval.
EUA Cogenex Sale Negotiations
In March 1998, EUA announced that it had entered into exclusive
negotiations with an unnamed potential purchaser for the sale of EUA's energy
services subsidiary, EUA Cogenex. On May 7, 1998, EUA announced that it had
ceased discussions on the potential sale. With its industry leadership
position, over 1,000 customers, a substantial book of business for 1998 and
the increasing consumer demand for efficiency services, EUA felt that
continued discussion with the unnamed potential purchaser would not maximize
shareholder value. EUA believes that Cogenex is a valuable asset to EUA and,
under the right conditions, could be of even more value to a national power
marketer, facilities service company or equipment supplier. The immediate
plans for EUA Cogenex are to continue the efforts that proved successful in
1997.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
See "Note C - Commitments and Contingencies: Recent Nuclear Regulatory
Commission (NRC) Actions" for a discussion of pending legal actions involving
several of the nuclear plants in which Montaup has an ownership interest.
Other
EUA occasionally makes forward-looking projections of expected future
performance or statements of our plans and objectives. These forward-looking
statements may be contained in filings with the SEC, press releases and oral
statements. Actual results could differ materially from these statements.
Therefore, no assurances can be given that such forward-looking statements and
estimates will be achieved.
Item 5. Other Information
NEPOOL is a voluntary organization open to any person engaged in the
electric business such as investor-owned utilities, municipals, cooperative
utilities, power marketers, brokers and load aggregators. On December 31,
1996, NEPOOL, on behalf of its participants, filed a restructuring proposal
with FERC. The key elements of the restructuring proposal are the
implementation of a regional NEPOOL Open Access Transmission Tariff (NEPOOL
Tariff), the creation of an Independent System Operator (ISO), and the
restatement of the NEPOOL Agreement to establish a broader governance
structure for NEPOOL and to develop a more open competitive market structure.
On June 25, 1997, FERC issued an order conditionally authorizing the
establishment of an ISO by NEPOOL effective July 1, 1997, affirming that the
transfer of control of transmission facilities owned by the public utility
members of NEPOOL to the ISO is consistent with the public interest under
Section 203 of the Federal Power Act.
To give market participants more choice and to foster competition, the
restructured NEPOOL proposes the unbundling of electric service in the NEPOOL
control area. The restructured NEPOOL calls for the development of competitive
wholesale markets for installed capability, operable capability, energy,
automatic generation control, and reserves. These wholesale products will be
market priced based on bid clearing pricing rather than the current cost-based
pricing. Market participants will be able to meet their responsibility for
these products by buying or selling these various services through bilateral
transactions or through the regional power exchange that will be administered
through the ISO. The installed capability market was implemented in April of
1998, and the operable capability, energy, automatic generation control and
the reserve markets are expected to start during the fourth quarter of 1998.
In general, the EUA System companies support the changes to NEPOOL
because much of the cross-subsidies for sharing costs will be eliminated.
These changes will have an impact on the Company's operating revenues and
costs as NEPOOL transitions from a cost based to a bid based system.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits - None
(b) Reports on Form 8-K - On March 24, 1998, the Registrant filed a
current report on Form 8-K with respect to Item 5 (Other Events).
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Eastern Utilities Associates
(Registrant)
Date: May 15, 1998 /s/Clifford J. Hebert, Jr.
Clifford J. Hebert, Jr.
(on behalf of the Registrant and
as Principal Financial Officer)
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